Rapidly growing 'buy now, pay later' services such as Afterpay and Zip are being accused of pushing one-in-six young people into debts they cannot afford.

Market leader Afterpay is now worth about $3.6 billion on the share market and attracting high-profile investors — but it has also caught the eye of a Senate inquiry that is examining financial credit services targeting vulnerable consumers.

University student Renny O'Dwyer, 19, said her shopping habit accelerated when she discovered Afterpay.

"When I shop, it's quite an addictive thing — you get adrenaline when you purchase things," she told PM.

Ms O'Dwyer earns about $300 a week from a part-time job and Centrelink student payments combined, but she was seduced by sites offering online shopping with no up-front payment or interest.

"I would more often than not just keep using it, and for things that I wouldn't necessarily buy," Ms O'Dwyer said.

"You just think, 'Oh it will sort itself out, I'm earning money next week, it'll all be OK' … that's a dangerous mindset to have."

"Afterpay is not in the business of offering a $20,000, or even a $5,000 loan," Mr Molnar said.

"We're not a line of credit."

He told the hearing that customers were not allowed to keep using Afterpay while they have late payments outstanding and that, while the average outstanding credit card debt is $4,200, the average outstanding balance for an Afterpay account was just $208.

But Afterpay's unpaid debts do attract late fees — there is a $10 charge for each late payment, with a maximum late fee of 25 per cent of the purchase price or $68, whatever is lower, which can be the equivalent of a high interest rate if all payments on a purchase are late.

Despite these charges, Afterpay's founders told the committee that only 20 per cent of its revenue comes from customers, while around 80 per cent comes from retailers who pay to have access to the service because it boosts sales.

It is a very different business model from its main rival Zip, partly owned by Westpac, which gets between half and 60 per cent of its revenue from customers through a combination of monthly account fees and late charges, with the remainder coming from retailer fees.

Zip is currently significantly smaller than Afterpay, with a market value of $363 million.

Afterpay v Zip in buy now, pay later wars

However, Zip has a potential advantage over Afterpay in the buy now, pay later wars — it told the committee it conducts far more extensive conventional credit checks on new users than its rival does.

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Zip co-founder Peter Gray said his company used an algorithm to do ID and data checks on applicants before they were approved to use the service, including three months' worth of bank statements to assess their financial positions.

When asked what credit checks Afterpay does, Anthony Eisen, another co-founder of the company, gave a non-specific answer, offering to provide the committee members with more detail in a written document, as the details were "quite sensitive information".

"Our checks revolve around three core areas: One is identity and fraud, the other is merchant risk and product risk, and thirdly, it's around repayment capability," he said.

Mr Eisen added that around 30 per cent of attempted transactions are rejected and up to 50 per cent for first-time customers.

"If, as a customer with Afterpay, you miss one single payment your account is immediately suspended," he said.

"You cannot pay us a fee to kick the can down the road and pay in the future, you are very simply off the system, and there's no exceptions."

Despite this, 22 per cent of Afterpay customers have paid late fees at some point while using the service.

Labor senator Jenny McAllister questioned whether that was an indication many people were getting credit they should not be.

Mr Molnar responded that only 5 per cent of transactions conducted last financial year incurred a late payment fee.

Is buy now, pay later a loan?

This goes to a key issue the committee is looking at, which is whether buy now, pay later should be treated as a credit product and regulated as such.

This would make it subject to the responsible lending laws that so many major financial institutions risk falling foul of for credit cards and home loans in the wake of the banking royal commission.

Zip co-founder Larry Diamond is not too concerned, because he said his company's credit checks already complied with most of the rules.

"We wholeheartedly support ASIC's position that buy now, pay later is a form of credit," he told the committee, while calling for a "reasonable and fair" and not "heavy handed" approach.

Afterpay admitted it would have to significantly overhaul its business model if it was subject to those laws, and is arguing for regulation to be tailored to the buy now, pay later sector.

"Afterpay is in favour of appropriate regulation that recognises innovative new products," he said.

"I can see how it is easier to regulate Afterpay like traditional credit products, but that is a blunt and simple solution to a more complex issue and one that risks stifling innovation."

Alexandra Kelly, a principal solicitor at the Financial Rights Legal Centre, said buy now, pay later services were not properly regulated under the National Consumer Credit Protection Act.

"I think they need to accept that they are a financial product," she said.

"There may not be interest that they're charging but, for many consumers, they're going to treat it in the same way as a personal loan or as a credit card, and that they need to have some corporate responsibility."

Ms O'Dwyer said she had paid off all her Afterpay debt after making a New Year's resolution to stop using the service.

"I added up all my payments and I spent $3,110 last year on Afterpay," she said.

She is now embracing her new debt-free life.

"My payday's Monday, so it was nice to have a payday and not have to pay off any bills."